4 red flags that a retirement investment is a scam

July 21, 2022 12:24 PM

Every year, thousands of elderly Americans lose money to scams. Experts say con artists particularly prey on seniors, hoping to defraud them of decades of retirement savings. The best defense is to know the warning signs — or for a helpful advisor to share them with clients.

The numbers on elder fraud in the U.S. are significant, and rising. In 2021, more than 92,000 victims over the age of 60 reported being scammed to the FBI’s Internet Crime Complaint Center, which calculated a total of $1.7 billion in losses. That’s a 74% increase over the amount stolen in 2020.

Of last year’s total, nearly $2.4 million was lost through investment scams: a stark reminder that not all cons involve outlandish stories of kidnappings, romance, or unclaimed lottery winnings. Some hustles simply exploit the most practical of desires: to make one’s nest egg last through retirement.

If they can spot a scam before it takes hold of them, retirees and those soon to leave the workforce need not lose their life savings. They just need to know what to look for. Financial Planning asked two experienced fraud experts about the red flags that an investment opportunity is, in fact, too good to be true. Here’s what they told us.

1. Cold calling

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The first sign that an opportunity is a scam is the way the investor hears about it. Typically, a scammer will reach out to the target directly by phone or email, without ever having met or spoken before. The fact that such contact is out of the blue, experts say, should set off alarm bells.

“If somebody has contacted you or cold called you, run as fast and as far away from that opportunity as possible,” said Bill Singer, an attorney with over 40 years of experience representing defrauded investors.

The scammer may have gotten the phone number from a list sold on an online black market, or from someone in the victim’s community — an exploitation of trust called “affinity fraud.” Either way, the unsolicited contact is a bad sign. Investors should choose the financial professionals they want to work with, not the other way around.

“Think of it as an inbound solicitation,” said Kathy Stokes, the director of Fraud Prevention Programs at AARP. “They want you to give them money for something; you didn't go looking for them. If you're interested in investing, don't wait for the next cold call or the next email.”

2. Guaranteed profit

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Another major red flag is the promise of enormous profits, or of any profit at all.

“Anyone that’s guaranteeing you that they’re going to double your money — they’re lying,” Stokes said.

As she and Singer both pointed out, scam artists typically offer fantastic returns on an investment — gains that they can somehow predict with absolute certainty. This is already a sign of dishonesty, because no one can perfectly predict the stock market.

“The promise of returns is in itself a fallacy,” Stokes said. “You don’t know the future. As good an advisor as you may be, you cannot guarantee me what I'm getting back.”

Or, as Singer put it, “If it’s too good to be true, it’s too good to be true.”

3. Time pressure

Another red flag is what Singer calls “the bum’s rush”: The scammer offers an amazing opportunity, but says time is limited — you’ve got to join now or you’ll miss your chance. Experts say those chances are better off missed.

“If you’re offered an investment opportunity but you have to send in the check and sign up tomorrow, say ‘Thank you’ and wish them the best,” said Singer.

The point of this fast-paced pitch, he said, is to give the investor no time to think. The scammer might say there’s been an opening in their investment group but it won’t last long, or that their leader is only in town for a week before he heads back to his estate in Monaco. Whatever the story, investors should steer clear.

“They don’t want you to think, because if you think, you’re going to ask questions, and they don’t have time for that,” Singer said.

4. Changing platforms

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One of the surest signs that something is a scam, Stokes said, is that it moves from one online platform to another. For example, the conversation may begin on Facebook, and then suddenly the purveyor of the “opportunity” asks to talk on Google Hangouts.

The point of this migration, Stokes said, is to take the conversation to a site “where they think they have a better chance of not getting caught.”

Similarly, the fraudster may change the venue of the financial transactions. For instance, initial investments may be through a legitimate cryptocurrency exchange. The victim invests a few small sums, and the account builds — until the scammer makes a suggestion.

“At some point he says, ‘Okay, we’re going to go to this different platform,’” Stokes said. “That platform is entirely fraudulent.”

On the new, fake crypto exchange, the victim sees her money grow and grow.

“She keeps putting money in, and she keeps seeing the paper returns,” Stokes said. “And then she’s like, ‘Oh! $20,000! I'm going to take this money out now.’ She goes to take it out and it doesn't exist.”

By that point, sadly, it’s often too late for the victims to recover their money.

How advisors can help

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The worst kind of outcome, in which a person on the verge of retirement loses the savings they earned over a lifetime, is tragic. Fortunately, it’s also preventable. If an investor knows the warning signs of a scam, they can catch it early and avoid becoming a victim. Advisors can help them do it.

“Have the conversations with your clients — of any age,” Stokes said. “Help them understand that if you're building wealth or you have money, you're a likely target, and that money can go away very quickly. And there's almost no chance of getting that money back.”

Stokes urges advisors to talk about fraud at every quarterly or annual meeting with their clients, and remind them of the red flags to watch out for. There are also other resources: Concerned investors can sign up for AARP’s Watchdog Alerts for warnings about the latest scams, or call the Fraud Watch Network Helpline at 877-908-3360.

Both Stokes and Singer emphasized, however, that it’s not just the elderly who are vulnerable to scams. Criminals also target Americans in their prime working years, and an aging mind is not a prerequisite for getting conned.

“You do not have to be of a certain age to fall victim to these crimes,” Stokes said. “All along the track of saving, whether it's saving for your kid's education or the new house, or ultimately retirement, those assets are just simply at risk because these criminals are so good at what they do.”